Financial Statements Review 2010

Transcription

1 Financial Statements Review 2010

2 Metso Corporation s Financial Statements Review, January 1 December 31, 2010 Another successful year for Metso Highlights of 2010 New orders worth EUR 5,944 million were received in 2010, i.e. 36 percent more than in the previous year (EUR 4,358 million in 2009). At the end of 2010, the order backlog was 18 percent higher than at the end of December 2009, amounting to EUR 4,023 million (EUR 3,415 million on December 31, 2009). Net sales increased 11 percent from the previous year, and were EUR 5,552 million (EUR 5,016 million in 2009). Earnings before interest, tax and amortization (EBITA), before non-recurring items, were EUR million, i.e. 8.8 percent of net sales (EUR million and 8.0% in 2009). Operating profit (EBIT) was EUR million, i.e. 8.0 percent of net sales (EUR million and 5.9% in 2009). EBIT includes EUR 11.8 million in positive non-recurring items (EUR 64.7 million in negative non-recurring items in 2009). Highlights of the last quarter of 2010 New orders worth EUR 1,498 million were received in October December, i.e. 10 percent more than in the comparison period (EUR 1,365 million in Q4/2009). Net sales increased 25 percent on the comparison period, and were EUR 1,687 million (EUR 1,353 million in Q4/2009). Earnings before interest, tax and amortization (EBITA), before non-recurring items, were EUR million in October-December, i.e. 8.9 percent of net sales (EUR 88.0 million and 6.5% in Q4/2009). Operating profit (EBIT) was EUR million, i.e. 7.8 percent of net sales (EUR 55.0 million and 4.1% in Q4/2009). The EBIT includes EUR 3.1 million in negative non-recurring items (EUR 21.8 million in negative non-recurring items in Q4/2009). Earnings per share were EUR 0.50 (EUR 0.18 in Q4/2009). Earnings per share were EUR 1.71 (EUR 1.06 in 2009). Free cash flow was EUR 435 million (EUR 717 million in 2009). Return on capital employed (ROCE) before taxes was 13.5 percent (10.0% in 2009). The Board proposes a dividend of EUR 1.55 per share equaling to 91 percent of earnings per share (EUR 0.70 and 66% of earnings per share in 2009). Financial Statements Review

3 Metso s President and CEO Jorma Eloranta expresses his satisfaction with the achievements last year. We made good progress on many fronts: we saw clear recovery in our orders, we maintained strong cash flow throughout the year in spite of growing business volumes and all of our profitability indicators improved, too. I am especially pleased with our services business which grew strongly and represented 45 percent of our business. Likewise we saw the benefits of our strong presence in emerging markets with one half of our net sales coming from those growth areas. I appreciate the efforts of our employees in achieving these good results and want to thank all for making 2010 another successful year for Metso. At an annual level we delivered about EUR 100 million improvement in our underlying operational performance. This we achieved despite our fourth-quarter profitability being somewhat hampered by some low margin projects in Paper and Fiber Technology and by overall increase in our fixed costs. The increase in our fixed costs was largely driven by our getting prepared for continued growth in our delivery and order volumes. The Board of Directors dividend proposal of EUR 1.55 per share reflects not only our solid financial position but also confidence in Metso s future performance. At the same time, we are maintaining a strong balance sheet to develop Metso further. Based on the development last year and assuming that the gradual recovery of the global economy will continue, we estimate that Metso s net sales in 2011 will grow over 10 percent compared to 2010 and EBITA before non-recurring items will improve, Eloranta notes. This year will not be without challenges: there is the fragility of the economic recovery in certain areas, climbing inflation especially in the emerging markets, exchange rate fluctuations and tough competition in large pulp and paper projects to mention a few. On the positive side the outlook in the Mining business continues to improve and prospects for services across our businesses remain strong. The past years have clearly proven Metso s agility and competitiveness. The new Metso Executive Team is ready to take over from March onwards and I am confident that under Matti Kähkönen s leadership Metso is in a strong position to deliver continued profitable growth, Eloranta concludes. Metso s key figures EUR million Q4/2010 Q4/2009 Change % Change % Net sales 1,687 1, ,552 5, Net sales of services business ,453 2, % of net sales Earnings before interest, tax and amortization (EBITA) and non-recurring items % of net sales Operating profit % of net sales Earnings per share, EUR Orders received 1,498 1, ,944 4, Orders received of services business ,637 1, Order backlog at end of period 4,023 3, Free cash flow Return on capital employed (ROCE) before taxes, % Equity to assets ratio at end of period, % Gearing at end of period, % Financial Statements Review

4 Metso s fourth quarter 2010 review Operating environment and demand in October December There were no material changes in Metso s business environment after the third quarter of The gradual recovery of demand continued in most of our customer industries in the last quarter. The outlook in emerging markets remained strong, and demand for new equipment and projects is concentrated in these areas in particular. The uncertainty caused by the budget deficits in certain European countries and the United States as well as fluctuations in the exchange rates slowed the recovery of the markets in Europe and North America. The rising capacity utilization rates of our customer industries supported our services business, and our customers are gradually regaining their confidence to increase their investments also in new capacity and replacement equipment. Mining companies have raised their capital expenditure plans and consequently requests for quotations on equipment and projects clearly increased during the year. Although the pipeline for larger investments in new capacity is getting stronger, only few decisions on those were made. The new orders we received in the last quarter of the year still mostly consisted of small and medium-size orders for replacement and capacity increase investments or were related to our services business. Due to the clear increase in minerals production and our large installed equipment base, demand for our services for mining customers remained strong. In the construction industry, demand for equipment relating to aggregates production continued strong during the fourth quarter in emerging markets in Asia, Brazil and Eastern Europe. Demand for construction equipment improved during the last quarter in Western Europe and North America primarily due to growing replacement investment needs. Demand for our services business for the construction industry also improved and remained satisfactory. Demand for power plants utilizing renewable energy sources was satisfactory in Europe and North America in the fourth quarter; however, uncertainty in the financial markets and pending policies on support mechanisms for renewable energy delayed final decisions in several projects. Demand for our power services business continued to be good. Demand for our automation products remained good in the fourth quarter, as the oil, gas and petrochemical industries increased their investments due to the increase in energy prices and demand. Demand for our automation solutions by the pulp and paper customers was satisfactory. Demand for our services business for automation continued to be good. The demand for metal and solid waste recycling equipment remained satisfactory during the fourth quarter. Demand for recycling equipment services improved in 2010 alongside the increasing capacity utilization rates of our customers plants and equipment, and was satisfactory. Demand for new fiber lines, rebuilds and pulp mill services clearly recovered during the year and was satisfactory in the fourth quarter. In South America and Asia negotiations for large pulp mill projects continued. Demand for paper and board lines at the end of the year was satisfactory and for tissue lines good. The improved capacity utilization rates in the paper and board industry kept the demand for our services business good. Orders received in October December In October-December, we received new orders worth EUR 1,498 million, i.e. 10 percent more than in the comparison period (EUR 1,365 million in Q4/2009). The share of emerging markets in our orders received was 52 percent (46% in Q4/2009). Orders received by Mining and Construction Technology increased clearly on the weak comparison period; orders received by Paper and Fiber Technology decreased somewhat on a comparable basis (excluding the impact of acquired Fabrics business, i.e. the former Tamfelt and currency translation) from the comparison period; Energy and Environmental Technology s orders decreased from the exceptionally strong comparison period. Services orders received increased 31 percent on the comparison period (21% when eliminating the impact of the acquired Fabrics business) and accounted for 44 percent of the total orders (36% in Q4/2009). Services orders grew in all segments. Orders received by Mining and Construction Technology in October December amounted to EUR 651 million, which was 42 percent more than in the comparison period (EUR 457 million in Q4/2009). This was the eighth consecutive growth quarter in orders received since the last quarter of Orders received from mining customers increased 36 percent and orders from construction customers increased 52 percent. Services business orders were up 30 percent and accounted for 48 percent of all segment s orders received; the growth came equally from both customer industries. Orders received in the fourth quarter did not include any larger orders and consisted of small and medium-size equipment and project orders, as well as services business orders. In Energy and Environmental Technology, the final quarter was the strongest in 2010 in terms of orders received, but compared to the strong comparison period, orders decreased 11 percent and amounted to EUR 447 million (EUR 504 million in Q4/2009). Orders received by the Power business decreased 23 percent from the exceptionally strong comparison period and those of the Automation business grew 5 percent. In the Recycling business, orders received grew 18 percent. Orders received from the services business were up by 19 percent and accounted for 32 percent of all the segment s orders received. Our orders received included the largest recovery boiler in the American continent for Eldorado Celulose e Papel in Brazil and a biomass power plant for Oü Helme Energia in Estonia. Orders received by Paper and Fiber Technology decreased from the comparison period and totaled EUR 387 million in October December (EUR 401 million in Q4/2009). New orders were particularly low in the Paper business, as no major paper or board machine orders were recorded in the fourth quar- Financial Statements Review

5 ter. Orders received from the services business grew over 40 percent (8% when eliminating the impact of the acquired Fabrics business) and accounted for half of the segment s orders received. Orders received by the Fiber business were on par with the comparison period, while the Tissue business had strong order intake, as we received orders for four new tissue lines to China. Orders received during the period included rebuilds, such as two board machines for M-real in Finland, a paper machine for UPM s mill also in Finland and a pulp machine for the Canadian company Hinton Pulp. Financial performance in October December Our net sales in October December totaled EUR 1,687 million, which is 25 percent more than a year earlier (EUR 1,353 million in Q4/2009). The services business net sales increased 33 percent on the comparison period (26% when eliminating the impact of the acquired Fabrics business), and accounted for 43 percent of total net sales (40% in Q4/2009). In the fourth quarter, our earnings before interest, tax and amortization and non-recurring items (EBITA before nonrecurring items) were EUR million, i.e. 8.9 percent of net sales (EUR 88.0 million and 6.5% in Q4/2009). Profitability was negatively impacted in Paper and Fiber Technology by delivery mix both in the capital and services parts of the business and by an increase in provisions in some projects where new technologies were launched. Metso s operating profit (EBIT) was EUR million, i.e. 7.8 percent of net sales (EUR 55.0 million and 4.1% in Q4/2009). Our EBIT for October December included the following nonrecurring items, which had a total negative impact of EUR 3.1 million on our performance (EUR 21.8 million in negative nonrecurring items in Q4/2009): Non-recurring items and amortization of intangible assets in October-December Q4/2010 EUR million Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso Group EBITA before non-recurring items % of net sales Capacity adjustment expenses Gain on sale of Talvivaara shares Intellectual property related items Net effect for prior years ICMS (VAT) tax credits in Brazil Costs related to business acquisition projects Amortization of intangible assets *) Operating profit (EBIT) *) Includes EUR 7.9 million amortization of intangible assets acquired through business acquisitions. Q4/2009 EUR million Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso Group EBITA before non-recurring items % of net sales Capacity adjustment expenses Gain on sale of Talvivaara shares Amortization of intangible assets *) Operating profit (EBIT) *) Includes EUR 4.8 million amortization of intangible assets acquired through business acquisitions. The profit attributable to shareholders was EUR 76 million in the fourth quarter (EUR 25 million in Q4/2009), corresponding to earnings per share (EPS) of EUR 0.50 (EUR 0.18/share in Q4/2009) Our free cash flow remained strong during the fourth quarter and was EUR 114 million. In spite of the clear increase in our business volumes our net working capital remained almost unchanged. Financial Statements Review

6 Metso s Financial Statements Review 2010 Operating environment and demand in 2010 The overall positive tone in the global economy and the gradual recovery of demand continued in most of our customer industries in The budget deficits of several European countries and the United States together with high volatility in currency exchange rates created uncertainties in the financial markets, which overshadowed the upswing in the markets. Many major mining companies have confirmed significant capital investment programs for the coming years. As a result capacity expansion plans clearly increased, and the amount of quotations for equipment and projects continued to strengthen throughout the year. Several smaller mining companies still have financing challenges to push their projects forward but the situation is improving with them, too. Due to our large installed equipment base and our customers growing production volumes, demand for our mining services also strengthened markedly during the year. Demand for mining equipment has so far related mostly to small and mediumsize replacement and expansion investments, but towards the end of the year there was a clear increase in quotations for bigger new capacity expansion investments, too. Demand for equipment and services used in aggregates production by the construction industry was strong throughout the year in the emerging markets in Asia, Brazil and Eastern Europe, and showed first signs of recovery during the last quarter also in Europe and North America. Demand for power plants utilizing renewable fuels was good in Europe and North America; however, uncertainty in the financial markets and pending policies on support mechanisms for renewable energy delayed final decisions on orders in several projects. Demand for our automation products clearly strengthened during the year as the oil, gas and petrochemical industries increased their investments due to the increase in energy prices and demand. Demand for metal and solid waste recycling equipment and related services also turned positive as a result of the global upswing in the demand for steel, but overall it still remained weak. Demand for new fiber lines, rebuilds and pulp mill services clearly recovered during the year from the low levels of the past few years. Some large pulp mill projects in South America became active during the second half of the year but competition remained tough. Demand for tissue lines was strong both in the emerging as well as in the developed markets. Demand for paper and board lines was at the previous year s satisfactory level with demand coming primarily from China and smaller size board machines. The improved capacity utilization rates in the paper and board industry kept the demand for our services business good. Orders received and order backlog Orders received in 2010 totaled EUR 5,944 million, an increase of 36 percent on the comparison period. Excluding the effect from exchange rate translation, the growth would have been 27 percent. New orders significantly increased in all business segments and in all geographical regions. Our customers improved capacity utilization rates were also reflected in the strong 36 percent growth (28% excluding the impact of the acquired Fabrics business) in our services orders compared to the previous year. The three countries with the highest value of orders received were China, the United States and Brazil, which together accounted for 37 percent of all orders received. All the four BRIC (Brazil, Russia, India and China) countries were among the seven largest countries measured in new orders. The share of emerging markets in our orders received was 53 percent (48% in 2009). At the end of December, our order backlog was EUR 4,023 million, which is 18 percent stronger than at the end of 2009 (EUR 3,415 million). Around EUR 3.1 billion of the deliveries in our order backlog are expected to be recognized as net sales in 2011, and around EUR 850 million of these are services business orders. The order backlog at the end of 2010 included some EUR 375 million in projects (some EUR 395 million on September 30, 2010) with uncertain delivery schedules and which will, according to present estimates, be delivered after The uncertainties in the order backlog mostly concern the Fibria pulp mill project in Brazil. Orders received by reporting segment EUR million % of orders received EUR million % of orders received Mining and Construction Technology 2, , Energy and Environmental Technology 1, , Paper and Fiber Technology 1, , Valmet Automotive Intra-Metso orders received Total 5, , Financial Statements Review

7 Orders received by market area EUR million % of orders received EUR million % of orders received Europe 2, , North America South and Central America 1, Asia-Pacific 1, , Africa and Middle East Total 5, , Net sales Our net sales for 2010 increased 11 percent on the comparison period and were EUR 5,552 million (EUR 5,016 million in 2009). Excluding the effect from exchange rate translation, the growth in net sales would have been 4 percent. The growth came from Paper and Fiber Technology, which recorded an increase of 32 percent and from Mining and Construction Technology, with an increase of 8 percent. Energy and Environmental Technology s net sales declined 6 percent due to the low level of new orders in the previous year. Net sales for our services business increased 17 percent (excluding the impact of the acquired Fabrics business the growth was 10 percent) and its share of the total net sales increased to 45 percent (42% in 2009). Measured by net sales, the largest countries were China, the United States and Brazil, which together accounted for 36 percent of our total net sales. The share of emerging markets in our net sales was 50 percent (44% in 2009). Net sales by reporting segment EUR million % of net sales EUR million % of net sales Mining and Construction Technology 2, , Energy and Environmental Technology 1, , Paper and Fiber Technology 1, , Valmet Automotive Intra-Metso net sales Total 5, , Net sales by market area EUR million % of net sales EUR million % of net sales Europe 1, , North America South and Central America Asia-Pacific 1, , Africa and Middle East Total 5, , Financial Statements Review

8 Financial result In 2010 our EBITA before non-recurring items was EUR million, i.e. 8.8 percent of net sales (EUR million and 8.0% in 2009). The improvement in our profitability resulted primarily from an increase of over one percentage point in the gross profit margin as a result of higher capacity utilization rates and sales volumes. The EBITA margin in 2010 was negatively affected by over one percentage point because of under-absorption in several manufacturing units while capacity utilization rates were still relatively low. Selling, general and administrative expenses increased on a comparable basis (excluding the impact of the acquired Fabrics business, currency translation and non-recurring items) less than 3 percent while we were preparing for increasing order and delivery volumes especially in Mining and Construction Technology. The profitability improved in the Mining and Construction Technology and Paper and Fiber Technology segments while Energy and Environmental Technology s profitability remained at the level of the previous year. In 2010 our operating profit (EBIT) was EUR million, i.e. 8.0 percent of net sales (EUR million and 5.9% in 2009). The EBIT includes EUR 11.8 million in non-recurring items, which had a positive impact (EUR 64.7 million in negative nonrecurring items in 2009), as specified in the following table. Non-recurring items and amortization of intangible assets 2010 EUR milliion Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso Group EBITA before non-recurring items % of net sales Capacity adjustment expenses Gain on sale of Talvivaara shares Intellectual property related items Gain on business disposal Credit loss reserve related to two paper machine customers Net effect for prior years ICMS (VAT) tax credits in Brazil Costs related to business acquisition projects Amortization of intangible assets *) Operating profit (EBIT) *) Includes EUR 32.9 million amortization of intangible assets acquired through business acquisitions EUR million Mining and Construction Technology Energy and Environmental Technology Paper and Fiber Technology Metso Group EBITA before non-recurring items % of net sales Capacity adjustment expenses Gain on sale of Talvivaara shares Hedging reversal due to a cancelled customer order Credit loss reserve related to two paper machine customers Amortization of intangible assets *) Operating profit (EBIT) *) Includes EUR 18.5 million amortization of intangible assets acquired through business acquisitions. Financial Statements Review

9 Group Head Office s operating profit in 2010 includes foreign exchange gains of EUR 10 million from foreign exchange hedge contracts made by reporting segments with Group Treasury (EUR 12 million gain in 2009). Corresponding foreign exchange losses are included in the operating results of the reporting segments. Net financing expenses for 2010 were EUR 75 million (EUR 72 million in 2009). Interest expenses were EUR 69 million (EUR 75 million in 2009). Net financing expenses include EUR 10 million in foreign exchange losses related to the above-mentioned Group Head Office s foreign exchange gain. Our profit before taxes was EUR 370 million (EUR 222 million in 2009), and our tax rate for 2010 was 30 percent (32% in 2009). The profit attributable to shareholders in 2010 was EUR 257 million (EUR 150 million in 2009), corresponding to earnings per share (EPS) of EUR 1.71 (EUR 1.06 per share in 2009). Return on capital employed (ROCE) before taxes was 13.5 percent (10.0% in 2009) and the return on equity (ROE) was 13.6 percent (9.8% in 2009). Cash flow and financing Following the substantial reduction in net working capital and exceptionally strong overall operating cash flow in 2009, cash generation was also good in Net cash provided by operating activities amounted to EUR 506 million (EUR 770 million in 2009). Thanks to continued focus on working capital management, our net working capital decreased EUR 25 million in January-December in spite of increasing delivery volumes. Free cash flow in 2010 was EUR 435 million (EUR 717 million in 2009). Net interest-bearing liabilities declined considerably and totaled EUR 310 million at the end of the year (EUR 583 million on December 31, 2009). Our total cash assets at the end of 2010 were EUR 1,051 million, EUR 406 million of which has been invested in financial instruments with an initial maturity exceeding three months. The remaining EUR 645 million has been accounted for as cash and cash equivalents. In December, we renewed the syndicated five-year EUR 500 million revolving credit facility. The facility is primarily to support short-term funding. Our liquidity position is good. In April, following the Annual General Meeting, we paid EUR 105 million in dividends for Our gearing continued to improve throughout the year and was 15.0 percent at the end of 2010 (32.5% in 2009) and our equity to assets ratio was 38.1 percent (35.7% in 2009). Capital expenditure Our gross capital expenditure in 2010, excluding business acquisitions, was EUR 135 million (EUR 117 million in 2009). The share of maintenance investments was 58 percent, i.e. EUR 78 million. Capital expenditure included two small technology related investment; in April we purchased the paper machine web inspection and web break system business and took over about 30 people, and in August we invested in rubber belt related business with 16 people to complement our service and product offering to the pulp and paper industry. We estimate new capital expenditure in 2011 to increase percent on The first phase of our largest single industrial investment so far, Metso Park in India, was completed in March and the second phase has been initiated. A technology center specializing in automation and flow control solutions and products was inaugurated in May in Shanghai, China. In York, Pennsylvania, USA, Mining and Construction Technology took up new office premises under operating lease arrangements in May. In June, construction work was started in Vantaa for a new facility to strengthen our global industrial valve production. This investment will also be accounted as an operating lease. In Araucaria, Brazil, construction work on a new facility for our regional pulping and power operations has been started. In Jyväskylä, Finland, we completed an upgrade of a pilot machine at the Paper Technology Center. In Zibo, our third service center in China for the pulp and paper industry was inaugurated in November. Investment projects in global enterprise resource planning (ERP) systems are underway in Mining and Construction Technology and in the Automation business. Mining and Construction Technology s ERP project is estimated to be completed during the first half of Acquisitions, divestments and joint ventures In November, the two investment companies Pontos Group and Finnish Industry Investment Ltd invested through a directed share issue a total of EUR 20 million into our automotive business, thereby giving them a total shareholding of 34 percent in Valmet Automotive. Valmet Automotive s key management will be committed and incentivized through a separate directed share issue under which the management will invest in Valmet Automotive, too. After these arrangements, Metso s ownership in the company will be somewhat over 60 percent. In connection with the above mentioned transaction, Valmet Automotive acquired Karmann s convertible roof systems in Germany and Poland. The acquired roof business employs over 700 people and the net sales were about EUR 170 million in As one of three leading suppliers of roof systems, Karmann has a market share of about 25 percent and delivery agreements spanning several years. In July, we acquired the repair service business of Wyesco of Louisiana, L.L.C., in the U.S. state of Louisiana. The business was affiliated to the Paper and Fiber Technology segment and it employs 30 people. In May, we completed the divestment of the Flexowell conveyor belt operations in Germany to ContiTech Transportbandsysteme GmbH. Flexowell was part of the Mining and Construction Technology segment. Financial Statements Review

10 In November 2009, we concluded a combination agreement with Tamfelt, one of the world s leading suppliers of technical textiles. The remaining 2 percent of Tamfelt s shares were redeemed in accordance with the Finnish Companies Act, and in May 2010 Metso gained title to all the shares in Tamfelt. Since December 2009, Tamfelt has been a part of our Paper and Fiber Technology segment and today constitutes the segment s Fabrics business line. Research and development Our research and development activities focus on several areas that are important in terms of sustainability and competitiveness, such as energy and raw material efficiency, utilization of recycled raw materials, process control technology and, increasingly, new services business solutions. We have concentrated our R&D work on projects that offer the best potential for capitalizing on our future growth opportunities. Our research and development expenses were EUR 111 million in 2010, i.e. 2.0 percent of Metso s net sales (EUR 115 million and 2.3% in 2009). In addition to this, expenses for intellectual property rights amounted to EUR 18 million in 2010 (EUR 15 million in 2009). Our R&D resources are spread throughout about 40 networked units in Europe, North America, South America and Asia and employed 829 people (763 in 2009) in Our personnel made approximately 780 invention disclosures during the year (620 in 2009), which led to more than 180 priority patent applications (200 in 2009). At the end of the year, approximately 3,000 Metso inventions were protected by patents (3,000 in 2009). In 2010, we launched a new, EUR 10 million stimulus package to accelerate our long-term strategic R&D and innovation activities. The program was focused on R&D supporting the growth of environmental and services business. Focus areas of our R&D during 2010 were services business, energy and environmental efficiency as well as features aimed at improving profitability of our customers investments. New products included, for example, service offerings for mining customers in which they can select inspection, site supervision, maintenance, process optimization and complete maintenance services and even performance contracts with risk and profit sharing options. Another example is a new energysaving layering concept for various packaging board grades reducing customers initial investment and operational costs. During the year, we launched several R&D cooperation projects with our partners, such as an industrial-scale development project for torrefaction with Swedish Bio Energy Development North AB. The target is to install an industrial-scale development unit in Örnsköldsvik, Sweden, for torrefaction of wood biomasses and residues from the agricultural sector. Torrefaction is a mild pyrolysis process, whereby green coal is produced from biomass. Green coal is a sustainable fuel and will play an important part as a substitute for fossil coal in power generation and gasification processes. In cooperation with Stora Enso and Domtar we established a long-term project to develop a future pulp mill biorefinery based on new pulping technology. The target is to develop a new concept that improves the energy efficiency and cost effectiveness of the process, has lower initial capital investment costs and reduces fiber usage, however without affecting its properties important to paper and board quality. We are also expanding our product development activities to emerging markets with a target to to localize and customize our products for the needs of new markets. We use our global product designs as basic development platforms which we then engineer locally. These products are also designed to use locally available materials and components and to be manufactured locally. For example in 2010 our Indian engineering team developed the first track-mounted crushing unit primarily for the Asian market and to be manufactured in India. The first units will be available for sale in Another good example is a small size recovery boiler designed by the Indian power engineering unit to be manufactured locally in India. The first boilers have already been delivered to customers. Environment and environmental technology The environmental impact of our own production is minor and relates mainly to the consumption of raw materials and energy, emissions to air, water consumption and waste. We are continuously improving our environmental management practices and the eco-efficiency of our production facilities, as well as developing our cooperation, towards greater environmental efficiency with our subcontractors and the entire supply chain. We set in 2009 Metso-wide global energy savings and carbon dioxide emissions targets for our production operations in an effort to reduce our energy consumption and emissions by 15 percent by 2015 and 20 percent by 2020, in line with the EU goals. Our first projects targeted at reaching those goals were launched in Many of Metso s technology solutions have been developed in close cooperation with our customers. The solutions are related to renewable energy sources, energy efficiency of our customers production processes, waste management, recycling, efficient utilization of raw materials and water, reducing dust, noise, carbon dioxide and particle emissions, and process optimization, to name a few. We also provide training, maintenance and other services related to our technology to secure efficient and sustainable use of the processes and equipment we have delivered. Risks and business uncertainties Our operations are affected by various strategic, financial, operational and hazard risks. We take measures to manage and limit the potential adverse effects of these risks. If such risks materialized, they could have material adverse effects on our business, financial situation, and operating result or on the value of Metso shares and other securities. Our risk assessments take into consideration the probability of the risks and the estimated impact of them on our net sales and financial results. The management estimates that Financial Statements Review

11 the overall risk level of the company is currently manageable in proportion to the scope of our operations and the practical measures available to manage these risks. The budget deficits in many European countries and the United States with potential negative impact on funding from capital markets coupled with strong fluctuations in exchange rates have increased the uncertainty which could slow the economic recovery particularly in Europe and North America. Despite this, we estimate that the business environment in our main customer industries continues to gradually improve because of the global megatrends like emerging markets growth, urbanization and increasing importance of environmentally sustainable process solutions. We estimate that the high share of our business derived from services and emerging markets will diminish the possible negative effects that market uncertainties may have. If the recovery in the global economy is interrupted, it might have adverse effects on new projects under negotiation or on projects in our order backlog. Some projects may be postponed or they may be suspended or canceled. At the moment less than 10 percent of orders in the order backlog are subject to uncertainties relating to delivery schedules. In long-term delivery projects the initial customer down payments are typically percent of the value of the project, in addition to which the customer makes progress payments during the project execution. This significantly decreases our risk and financing requirements related to these projects. We continually assess our customers creditworthiness and ability to meet their obligations. As a rule, we do not finance customer projects. We have adjusted our capacity and cost structure in order to maintain our competitiveness. Also our suppliers have strongly adjusted their capacity during the past two years and it is possible that now with the demand picking up suppliers ability to supply raw materials, components and subcontracting services may have weakened, which may result in delivery problems. If the recovery of the global economy is interrupted, the markets for our products may contract, which may lead to tightening price competition. Securing the continuity of our operations requires that sufficient funding is available under all circumstances. We estimate that our cash assets totaling EUR 1,051 million and available credit facilities are sufficient to secure short-term liquidity. Our committed credit facility, with five year maturity, is available for withdrawal and amounted to EUR 500 million. The average maturity for our long-term debt is 2.8 years. Less than one third of our long-term debt will mature by the end of There are no prepayment covenants in our debt facilities that would be triggered by changes in credit ratings. Some of our debt facilities include financial covenants related to capital structure. We fully meet the covenants and other terms related to our financing agreements. The levels of net working capital and capital expenditure have a fundamental effect on the adequacy of financing. We have developed our practices and the supporting information systems relating to managing net working capital and we expect that these will improve our ability to control movements in our net working capital as delivery volumes experience an upswing. As a result of these investments we estimate to be well-positioned to keep our capital expenditure at a moderate level in the coming years. At the end of 2010 we had EUR 880 million of goodwill on our balance sheet which is mainly related to business acquisitions made over the last 10 years. We conduct impairment tests regularly once a year and more frequently if needed, and have not detected any impairment. The sensitivity tests performed in connection with the annual impairment test indicated that there could be risk of impairment for the goodwill allocated to the Fabrics business acquired in 2009 in case our business environment would adversely differ from our assumptions. However, we do not believe that the assumptions used in the sensitivity tests are likely to be realized in the near future. The principles for the impairment testing are presented in our Annual Report. Changes in labor costs, the prices of raw materials and components can affect our profitability. Currently there are also high inflationary pressures. On the other hand, some of our customers are raw material producers, whose ability to operate and invest may be enhanced by strengthening raw material prices and hampered by declining raw material prices. Currency exchange rate risks are among the most substantial financial risks. Exchange rate changes can affect our business, although the wide geographical scope of our operations decreases the impact of any individual currency. In general, uncertainty in the economy is likely to increase exchange rate fluctuations. We hedge the currency exposures that arise from firm delivery and purchase agreements. The United States Department of Justice has closed its investigations related to the 2006 subpoena received by Metso In July 2010, Metso was informed by the Antitrust Division of the United States Department of Justice that it had closed its investigation of the rock crushing and screening equipment industry. In late 2006, Metso Minerals Industries, Inc. had received a subpoena from the Antitrust Division of the United States in which it called us to produce certain documents related to an investigation of potential antitrust violations. No further action has been brought against any party. Personnel At the end of the year, we had 28,593 employees, which was 5 percent and 1,427 employees more than at the end of 2009 (27,166 employees on December 31, 2009). Taking into account the impact of the acquired and divested businesses the increase in the number of personnel is 714 people. On a comparable basis, the number of employees increased by over 700 employees in Mining and Construction Technology which Financial Statements Review

12 is preparing for continued upswing in the business volumes. The number of employees decreased in Paper and Fiber Technology by about 100 people. The amount of personnel grew most in the South and Central America with high activity levels especially in the mining business. The share of our personnel in emerging markets increased to 34 percent (31%). During January December, we had an average of 27,585 employees. Mining and Construction Technology employed 36 percent, Energy and Environmental Technology 21 percent, Paper and Fiber Technology 36 percent, and Valmet Automotive, shared service centers and Group Head Office 7 percent of our personnel. The countries with the largest numbers of personnel were Finland, China, the United States, Sweden and Brazil. These countries employed 67 percent of Metso s total personnel. During 2010, we continued to develop our leadership skills, defined Metso Leadership Principles and started implementing them as part of leaders development discussions. We also developed our employee performance and development processes and carried out Metso s international training programs with special focus on fostering leadership skills and Metso-wide collaboration. In 2010 we continued the global implementation of our occupational health and safety monitoring system, OHS Monitor, and at the moment there are 18,000 Metso employees within the sphere of the system. All observed risks related to occupational health and safety are collected into the OHS Monitor and by analyzing them our target is that similar incidents can be prevented. Our long-term target is zero occupational accidents. The salaries and wages of Metso employees are determined on the basis of local collective and individual agreements, employee performance and job evaluations. Basic salaries and wages are complemented by performance-based compensation systems. In 2010, altogether EUR 1,106 million were paid in salaries and wages (EUR 991 million in 2009). Indirect employee costs were EUR 319 million in 2010 (EUR 303 million in 2009). Personnel by area Dec 31, 2010 % of total personnel Dec 31, 2009 % of total personnel Change % Finland 8, , Other Nordic countries 2, , Rest of Europe 4, , North America 3, , South and Central America 3, , Asia-Pacific 4, , Africa and Middle East 1, , Total 28, , Corporate Governance Statement We have prepared a separate Corporate Governance Statement of 2010 which follows the recommendations of the Finnish Corporate Governance Code for listed companies. It also covers other central areas of corporate governance. The statement will be included in our Annual Report, and it is published separately from the Board of Directors Report. The statement will also be available on our website at com/governance. Changes in top management In August, Metso s Board of Directors appointed Mr. Matti Kähkönen, M.Sc. in Engineering, as the new President and Chief Executive Officer of Metso Corporation and Metso Group. Kähkönen will start in his new position on March 1, 2011, when Metso s current President and CEO, Jorma Eloranta, will retire. Until then, Kähkönen will continue as President of Metso s Mining and Construction Technology segment. As of October 1, 2010, Kähkönen took over also as Metso s Executive Vice President and Deputy to the CEO and as Vice Chairman of the Metso Executive Team. In December, Metso s Board of Directors announced the changes in Metso s Executive Team, to take effect on March 1, Andrew Benko was appointed President, Mining and Construction Technology. He is currently President, Equipment and Systems business line, Mining and Construction Technology. Perttu Louhiluoto was appointed President, Energy and Environmental Technology. Louhiluoto is currently Senior Vice President, EMEA market area, Mining and Construction Technology. Pasi Laine was appointed President, Paper and Fiber Technology, and Metso s Executive Vice President and Deputy to the CEO. Laine is currently President, Energy and Environmental Technology. Harri Nikunen was appointed Metso Group s Chief Financial Officer. He is currently Senior Vice President, Finance, Paper and Fiber Technology. Merja Kamppari, Senior Vice President, Human Resources, Metso Group, was appointed as a member of the Metso Executive Team. Kalle Reponen, Senior Vice President, Strategy and M&A, will continue as a member of the Metso Executive Team. As of March 1, 2011, all of the above-mentioned individuals will report to Matti Kähkönen, who will be Chairman of the new Metso Executive Team. Financial Statements Review

13 Metso s current CFO, Olli Vaartimo, and the current President of Paper and Fiber Technology, Bertel Langenskiöld both turned 60 during the autumn and reached the age of retirement according to their executive contracts. They both have agreed to continue in their positions until March 1, 2011 and to support the changes in Metso s top management during the transition period until the end of June, when needed. Vaartimo and Langenskiöld will step down from the Metso Executive Team as of March 1, Financial targets and dividend policy In connection with our annual strategy process in August, our long-term financial targets were evaluated and kept unchanged. For further information on financial targets, please see our website: Decisions of the Annual General Meeting Our Annual General Meeting on March 30, 2010 approved the Financial Statements for 2009 and decided to discharge the members of the Board of Directors and the President and CEO from liability for the financial year The Annual General Meeting approved the proposals of the Board to authorize the Board to resolve on a repurchase of Metso s own shares, on share issue and granting of special rights and on donations to universities. The Annual General Meeting also approved the proposal to amend Article 8 (notice convening a meeting) of the Articles of Association. The AGM decided that a dividend of EUR 0.70 per share will be paid for The dividend was paid on April 13, The AGM elected Jukka Viinanen Chairman of the Board and Maija-Liisa Friman Vice Chairman of the Board. Erkki Pehu- Lehtonen and Mikael von Frenckell were elected as new members of the Board. The Board members re-elected were Christer Gardell, Yrjö Neuvo and Pia Rudengren. The AGM decided that the annual remunerations for Board members would be EUR 92,000 for the Chairman, EUR 56,000 for the Vice Chairman and EUR 45,000 for the members and that they be paid EUR 600 for each meeting they attend, including committee meetings. Based on the decision of the AGM, the Board members have used 40 percent of their annual remuneration to buy Metso shares. The Board members acquired the shares from the market within two weeks after the publication of the first-quarter 2010 interim report on April 29, Altogether 5,580 shares were acquired, which is percent of total amount of Metso shares. There are no specific principles for the ownership of the above-mentioned shares. The auditing company, Authorized Public Accountants PricewaterhouseCoopers Oy, was re-elected as our auditor until the end of the next AGM. The AGM decided to establish a Nomination board of the AGM to prepare proposals for the following AGM regarding the composition of the Board and director remuneration. Representatives of the four biggest shareholders were elected to the Nomination board based on the ownership information as of November 1, i.e Solidium Oy, Cevian Capital II Master Fund L.P., Varma Mutual Pension Insurance Company and Ilmarinen Mutual Pension Insurance Company. They have named the following people as their representatives for Metso s Nomination Board: Kari Järvinen, Managing Director (Solidium Oy); Lars Förberg, Managing Partner (Cevian Capital); Matti Vuoria, Managing Director, President and CEO (Varma Mutual Pension Insurance Company), and Harri Sailas, President and CEO (Ilmarinen Mutual Pension Insurance Company). Jukka Viinanen, Chairman of Metso s Board of Directors serves as the Nomination Board s expert member. On the basis of the decision by the AGM, Metso paid in 2010 a donation of EUR 1.9 million to the Aalto University Foundation and to other Finnish universities as follows: EUR 350,000 to Tampere University of Technology s TTY Foundation; EUR 100,000 to the University of Jyväskylä; and EUR 50,000 each to Åbo Akademi University, the Lappeenranta University of Technology and the University of Oulu. The donation authorization granted by the AGM was exercised in full. Members of Board committees and personnel representative Our Board elected members from among the Board for the Audit Committee and Remuneration and HR Committee at its assembly meeting on March 30, The Board s Audit Committee consists of Pia Rudengren (Chairman), Maija-Liisa Friman and Erkki Pehu-Lehtonen. The Board s Remuneration and HR Committee consists of Jukka Viinanen (Chairman), Mikael von Frenckell, Christer Gardell and Yrjö Neuvo. Metso s personnel groups in Finland have elected Jukka Leppänen as the personnel representative. Pursuant to the Finnish Act on Personnel Representation in the Administration of Undertakings, a personnel representative participates in the meetings as an invited expert with no voting rights or legal liability for the Board s decisions and his term of office is the same as the Board members term. Shares and share capital At the end of December 2010, our share capital was EUR 240,982, and the number of shares was 150,348,256. The number of shares includes 718,397 Metso shares held by the Parent Company, which represent 0.5 percent of all the shares and votes. The average number of shares outstanding in January-December of 2010, excluding Metso shares held by the Parent Company, was 149,682,703 and the average number of diluted shares was 149,836,864. During February-March 2010, we executed a repurchase of 300,000 of our own shares relating to our share-based management incentive program decided in October 2009 (Metso Share Ownership Plan ). The average purchase price of the shares was EUR and the total acquisition price EUR 7,047, During January-December, 8,780 shares were returned from Metso Share Ownership Plan participants to the parent company due to employment terminations. Market capitalization of Metso, excluding the shares held by the Parent Company, was EUR 6,255 million on December 31, 2010 (EUR 3,693 million on Dec 31, 2009). Financial Statements Review